RLX Technology Inc.

Hello, ladies and gentlemen. Thank you for standing by for the RLX Technology, Inc.' 's fourth quarter and full year 2024 earnings conference call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded and is expected to last for about 40 minutes. I will now turn the call over to your host, Mr. Sam Tsang, head of capital markets for the company. Please go ahead, Sam.

Thank you very much. Hello, everyone, and welcome to RX Technologies' fourth quarter and full year 2024 earnings conference call. The company's financial and operational results were released through PR Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting our IR websites at ir.relaxtech.com. Participants on today's call will include our Chief Financial Officer, Mr. Chao Lu, and myself, Sam Tsang, Head of Capital Markets. Before we continue, please note that today's discussions will contain further information made under the safe harbor provisions of the U.S. Private Securities Dedication Reform Act of 1995. These statements typically contain words such as may, will, expect, targets, estimates, intend, believe, potential, continue, or other similar expressions. Forelooking information involve inherent risks and uncertainties. The accuracy of these statements that could cause actual results to differ materially from those projected or anticipated, many of which are beyond our control. The company is affiliated advisors and representatives do not undertake any obligation to update this forward-looking information except as required under the applicable law. Please note that Rx Technologies' earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Our Rx press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to Mr. Chow Lu. Please go ahead.

Thank you, Sam. And thank you to everyone for joining our earnings conference call today. I will start with the overview of our 2024 performance and organizational initiatives, followed by an update on our overseas market, outlook for 2025, and the details of our 2024 financial results. 2024 was a pivotal year for RLX as our first full year operating in international markets following the termination of our non-compete agreement with Relax Inc. in November 2023. Throughout the year, we focused on enhancing our organizational structure and business models to drive successful overseas initiatives while maintaining stability in the China market after entering a new regulatory framework in 2022. As a result, we capped off strong 2024 results with our seventh consecutive quarter of sequential revenue growth, supported by our continued commitment to global expansion and effective localized strategies catering to each region's unique user base. Our outstanding results demonstrate our business's resilience and our ability to deliver growth amid an evolving industry landscape. Building a solid foundation for international growth was a top priority for 2024. We critically assessed our organizational structure and strength relative to our peers and identified key areas for improvement. Based on this review, we optimized our operational and management framework to support our long-term growth objectives. Moreover, people remain our most valuable asset. Therefore, we have invested heavily in upgrading our team, bringing in experts in FMCG, in-house product development, and regulatory compliance. Their passion for growing RLX's business and advancing the eVapor industry has empowered us to deliver effective, sustainable business models that will propel our long-term success and growth. On the operational side, tailoring our product portfolio and business strategies to local markets was essential. We deeply analyzed local market environments and consumer behavior, then utilized our insights to develop the right products to cater specifically to the needs of each market's adult smokers. For example, in Southeast Asia, we successfully launched two open system eVapor product series. Relax Prime and Spin Mini in the second half of 2024. These new product series have received strong positive feedback in Southeast Asia, reinforcing our belief that localized innovation is a critical driver for long-term growth. We also refined our route to market strategy by optimizing our distribution channels based on the specific characteristics of each market. Each market has its own development path, and we have been focusing on enhancing the efficiency of the distribution structure, finding the right partners, and ensuring the product channel fits. Turning now to the market environment and the trends that are emerging for 2025. As we expanded internationally throughout 2024, we encountered regulatory shifts across multiple markets. While these regulatory changes presented challenges, we viewed them as opportunities to strengthen our competitive position. Our ability to anticipate and quickly respond to evolving regulations is a key differentiator supporting our success beyond China. We proactively assess and adapt our strategies to ensure compliance while continuing to meet user demand. We also carefully monitor our existing products and channel inventory levels while building a robust product pool to remain prepared to react to abrupt, unexpected regulatory changes. Looking ahead to 2025, we have observed a slight slowdown in product innovation as the industry enters a more mature stage of development. We believe that going forward, success will be less reliant on blockbuster new products and instead depend on refined and efficient operations, channel development and product optimization. We are confident that we are well positioned to thrive in this environment. With our in-house e-liquid development team and production capabilities, We can hone in on key product elements like flavor, taste, and quality control to deliver high-quality products that meet user expectations both domestically and overseas. Before I move on to our financial performance, I am pleased To share that, our ESG efforts continue to win recognition from leading global ESG rating agencies in 2024. We received a AA rating from MSCI, upgraded from a single A rating. This is the highest MSCI ESG rating in the global tobacco industry. making RLX the highest scoring company in the global e-cigarette industry for three consecutive years. Driven by our dedication to social responsibility and value creation for all stakeholders, we will remain committed to integrating ESG best practices as we broaden our global footprint. Now let's move on to our financial results for the fourth quarter and full year of 2024. Please note that unless otherwise stated, all the financials we present today are in RMB terms. Starting with our top line, on a full year basis, our revenues were RMB 2.7 billion growing by an impressive 73.3% year over year, thanks to our international expansion's success. For the fourth quarter, we achieved revenues of RMB 813.5 million, a 56.3% year over year increase. The seasonal impact of the Christmas holiday contributed positively to our quarterly results, as Christmas is traditionally a peak period for retail sales of eVapor products. Additionally, some of our overseas distributors increased inventory ahead of the Chinese New Year holiday, which further boosted our fourth quarter sales. Turning to profitability, our four-year gross profit margin improved to 26.4% in 2024, marking a 2% point increase. Notably, in the fourth quarter of 2024, our gross profit margin increased by a 3.3 percentage point year-over-year to 27.2%. This improvement was primarily due to favorable changes in our revenue mix from international markets and cost optimization initiatives. In 2024, we recorded an operating loss of RMB 107.1 million. However, excluding the impact of stock-based compensation, Our non-GAAP operating income for the full year was RMB 262.5 million. For the fourth quarter alone, we achieved a non-GAAP operating profit of RMB 112.6 million, marking a sequential rise for the fifth consecutive quarter and a significant milestone in our return to non-GAAP operating profitability for the full year. Our profitability improvements were primarily driven by incremental contributions from our international business, as well as the operating leverage gained as we scaled our operations in the new markets. Moving forward, we expect further improvement in our non-GAAP operating margin as we scale our business. Additionally, we are carefully managing our headcount in the middle and back office functions as we expand regionally. As a result, we expect our operating expenses to grow more slowly than revenue, which will further enhance our profitability. In terms of cash flow, we achieved an operating cash inflow of RMB 497 million in the fourth quarter of 2024, up from RMB 305 million in the same quarter of the previous year, reflecting our ongoing business growth and improvements in working capital efficiency. As we mentioned on the last call, We are currently experiencing a negative cash conversion cycle. Inventory turnover days stood at 25 days in the fourth quarter of 2024, increased from 16 days in the third quarter of 2024 due to the seasonal impact of the Christmas and the Chinese New Year holidays. Our cash position remains solid. As of December 31st, 2024, our total financial assets, including cash and cash equivalents, restricted cash, and various short-term and long-term deposits and investments, stand at RMB 15.9 billion. In 2024, we returned approximately U.S. dollars $122.9 million to our shareholders, including approximately U.S. dollars $109 million through our share repurchase program and U.S. dollars $14 million through cash dividends we announced in November 2024. Supported by our solid fundamentals cash position, we will deepen our commitment to delivering value to our shareholders. Our objective is to return substantially all of our non-GAAP net profits through share repurchase programs and cash dividends. In conclusion, our strategic foresight and disciplined execution helped us navigate external uncertainties and strengthened our brand image among global adult smokers. While some of these efforts may not yield visible results in the short term, we believe their long-term positive impact on our global competitiveness will prove invaluable. As industry concentration continues to increase, our comprehensive industry leading capabilities position us to capture additional market growth and leverage the categories overall growth to create value for all our stakeholders. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.